SR&ED in the Federal Budget: Much Ado About Nothing. Or is it? (2023)
On March 28, 2023, the Liberal government Deputy Prime Minister and Minister of Finance, the Honourable Chrystia Freeland, released the Federal Budget 2023.
SR&ED in the Federal Budget – A Recap of Recent Budgets (pre-2023)
In 2017, a minor change was made which was covered in a brief bullet point under “Closing Tax Loopholes”:
Clarify the intended meaning of “factual control” under the Income Tax Act for the purpose of determining who has control of a corporation in order to prevent inappropriate access to supports such as the small business tax rate and the enhanced refundable 35-per-cent Scientific Research and Experimental Development Tax Credit for small businesses 1.
In the 2019 budget, a major change was proposed: repealing the use of taxable income as a factor in determining a CCPC’s annual expenditure limit for the enhanced SR&ED tax credit. As a result, small CCPCs with taxable capital of up to $10 million will benefit from unreduced access to the enhanced refundable SR&ED credit regardless of their taxable income.
The 2020 budget was not released due to the COVID-19 pandemic, while the 2021 budget contained no direct reference to the SR&ED program.
An interesting revelation was made with the 2022 budget, whereby the government stated they intended to undertake a review of the SR&ED program to ensure that it effectively encouraged R&D that benefits Canada. Specifically, the review was to examine whether changes to eligibility criteria would be warranted to ensure the adequacy of support and improve overall program efficiency.
SR&ED in the Federal Budget – This Year (2023)
In this year’s budget, the Government has stated they intend to continue with their review of the program (emphasis added):
The Scientific Research and Experimental Development (SR&ED) tax incentive program continues to be a cornerstone of Canada’s innovation strategy by supporting research and development with the goal of encouraging Canadian businesses of all sizes to invest in innovation that drives economic growth.
In Budget 2022, the federal government announced its intention to review the SR&ED program to ensure it is providing adequate support and improving the development, retention, and commercialization of intellectual property, including the consideration of adopting a patent box regime. The Department of Finance will continue to engage with stakeholders on the next steps in the coming months.2
It will be interesting to see what comes of this review as they explicitly stated in Budget 2022 that they would consider changing the eligibility criteria in order to ensure the “adequacy of support” and to “improve overall program efficiency.”
What does this mean?
It’s unclear. One of the promises of the Liberal platform in 2021 (Liberal Party Promises SR&ED Reform) suggested they would expand the program, not reduce it:
Reform the Scientific Research and Experimental Development Program to reduce red tape and the need for consultants, better align eligible expenses to today’s innovation and R&D, and make the program more generous for those companies who take the biggest risks, promoting productivity, new inventions, and the creation of good jobs. 3
Since the Liberal-NDP government is expected to be in place until 2025, we hope they will be able to stand behind their initial goals to expand and develop the SR&ED program; however, we have been writing about this program for over fifteen years and know that changes can happen at any time, sometimes with minimal warning.
What is the Impact?
We won’t know the full impact until the review is completed; however, when planning for a recession it is entirely possible costs will be cut. We are not sure if the SR&ED program will be among these costs.
At this time, there is still an opportunity to influence the outcome. If your company has benefitted from SR&ED, consider writing to your local MP. A list of MPs is available here: Find Members of Parliament – Members of Parliament – House of Commons of Canada (ourcommons.ca)
We would also encourage you to reach out to the CRA to provide feedback, particularly if you are a stakeholder: Contact us about SR&ED – Canada.ca
For analysis of previous budgets please see our articles: SR&ED in the Federal Budget: Changes are Coming (2022) and SR&ED In Federal Budgets (Summary).